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Spend & Save

Private Investor: I can still spot a gleam amid the banking gloom

OK, I called the bottom of the banks wrong last week. Almost no sooner had your copy of the paper hit the doormat than Bradford & Bingley issued its quadruple whammy of bad news – boss resigning, profit warning, failed rights issue and a virtual fire-sale of a 24 per cent stake to American private equity.

Actually, the last bit is probably a hopeful development. Unlike Northern Rock, at least someone wants Bradford & Bingley. Perhaps that's why there hasn't been a run on the bank. The private shareholders who are objecting to Texas Pacific Group getting its hold on B&B are right – but if they vote down the revised rights issue, then they are signing the bank's death warrant. If there's any chance of the small shareholders succeeding, then there probably will be a run on the bank and a collapse in its deposit base. The Bank of England's new special scheme for taking failing banks under its control is not yet in place, so that would be a reet mess.

The Americans have probably got themselves a bargain. They may, I admit, have made a mistake, and the name of this game is risk. The way the property market is going, we may be seeing an even nastier housing correction than we thought possible. That, the general malaise in the financial sector and the ramifications of the credit crunch are hardly good news for the wider economy.

However, even with all the gloom you can muster taken into account, you can still judge the banks to be cheap – as I mistakenly did last week, and as TPG has now.

I did resist the temptation to buy into B&B before the profit warning, because even I could see it was looking a bit dodgy. After the shares crashed on Monday, however, I did have a little punt, at 64p – and, so far, I am one of the few people outside TPG to be in the money on B&B. It is a bit wild, but it might one day bring a little reward.

I do feel sorry for the small investors in B&B who have held their shares since the building society decided to turn itself into a bank in 2000. I was one of those who received free shares in B&B, which I sold a few years later. I can't honestly remember how much I got for them; not the peak, but a tidy little bonus.

How lucky I was. I know people who've lost hundreds of pounds on this. The maximum payout at the time of flotation was £5,000 of free shares. So those investors are looking at a more significant loss, making due allowance for dividends and the tax liability for capital gains when the float happened. Then again, they got the shares for nowt, so how much of a loss will it prove to be in cash terms? Nil, in fact; a paper loss, but a shame nonetheless for the cause of popular capitalism.

The fate of the old building societies must make one wonder whether it was all worth it. Some have turned into outright disasters, like Northern Rock and Bradford & Bingley. Some have just shrivelled up and disappeared, like National & Provincial. Some of the proudest, such the Woolwich, Cheltenham and Gloucester and Birmingham Midshires, have been relegated to the status of brands for the big banks.

Abbey National, the one that started the trend in 1989, fell foul of corporate loans in 2001 and wound up as a branch of Banco Santander. The Halifax/Bank of Scotland merger doesn't seem to have done either that much good.

The odd one out is Alliance & Leicester, though it too seems to have its share of troubles and has seen its share price markedly depressed. It may be the one that gets away, although I cannot see it staying independent for much longer. Overall, though, I don't regret any of my recent bank share buys, and am happy to carry on buying them for the long term.

Even if this isn't the bottom, it may be quite near to it – and you can never call the bottom, anyway. The moves that have been made by Royal Bank of Scotland to raise funds and recapitalise have actually been successful, though others have been less well favoured. So my buy/holds in the sector are quite varied – Bradford & Bingley as a risky bottom-fishing punt; Alliance & Leicester as a less risky one; Barclays on the grounds of size and diversity; RBS because they are doing the right thing about fixing themselves; and Santander for the sake of diversity.

Banking is a fairly commoditised business that can make profits, but not spectacular ones. That is even more true of mortgage banking. Attempts to break out with new ventures have proved a mixed blessing, and we may not see many more such adventures for a decade.

We will also, I predict, see no more building societies deciding to convert into banks. The Nationwide Building Society, our biggest, should be told to stay mutual, at all costs.